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Supplementing our December 2006 report entitled Compacts of Free Association: Micronesia and the Marshall Islands Face Challenges in Planning for Sustainability, Measuring Progress, and Ensuring Accountability, this report provides information on the uses of economic assistance provided under the amended U.S. compacts with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) from 2004 through 2006.

From 1987 through 2003, the United States provided $2.1 billion in economic assistance to the FSM and the RMI through a Compact of Free Association. In 2003, the U.S. government approved amended compacts with the FSM and the RMI, providing a combined total of $3.6 billion for the two countries in 2004 through 2023. The amended compacts identify the 20 years of grant assistance as intended to assist the FSM and RMI governments in promoting the economic advancement and budgetary self-reliance of their people. Under the amended compacts, U.S. grant funding decreases annually, paired with increasing contributions to trust funds for the FSM and the RMI; earnings from the trust funds are intended to provide a source of revenue when the grants expire in 2023. In addition, the annual grant funding is partially adjusted for inflation. The amended compacts require the countries to target funding to six development sectors--education, health, the environment, public sector capacity building, private sector development, and infrastructure, with priority given to education and health. The amended compacts also provide for a supplemental education grant (SEG) for both countries. The Department of the Interior's (Interior) Office of Insular Affairs (OIA) is responsible for administering and monitoring the grants. The amended compacts' subsidiary fiscal procedures agreements (FPA) require the FSM and RMI governments to monitor the day-to-day operations of sector grants and activities, submit periodic performance reports and financial statements, and ensure annual financial and compliance audits. In addition, the compacts and fiscal procedures agreements require the U.S. and FSM Joint Economic Management Committee (JEMCO) and the U.S. and RMI Joint Economic Management and Financial Accountability Committee (JEMFAC) to (1) meet at least once annually to evaluate the progress of the FSM and the RMI, respectively, in achieving the objectives specified in their development plans; (2) approve grant allocations; (3) review required annual reports; (4) identify problems encountered; and (5) recommend ways to increase the effectiveness of compact grant assistance. Moreover, the FSM and the RMI are required to conduct annual audits within the meaning of the Single Audit Act, as amended.